Soriano: Visionaries as supermen: A look into Chinese family businesses-A A +A
Family Business Forum
Monday, September 1, 2014
“Conflict is healthy…unresolved conflict is not”
Conflict No. 4: Another likely reason is that the patriarch might have a certain vision or dream for all of his children owning the business and working together. It might not be acceptable within the family to question the feasibility of this vision or dream, and as such any talk about change in the style of management, succession or shareholders’ agreements or the possibility of family members exiting is perceived to be too sensitive.
Bigger family firms usually employ two options in the business succession planning: they either groom family members (typically sons and nephews) to become successors or tap capable and trusted professionals, preferably with Chinese descent, to the corporate “family” as future heirs to top management posts. For the first option, many Chinese patriarchs, deprived of education during their survival years, send their children to top universities and business schools.
Conflict No. 5: At the rate medical science has prolonged the life of business owners, family businesses will likely experience three generations working together in one lifetime. Visionaries and founders are not ready to give up control and in most mature industries where competition is pretty challenging, the likelihood of failure is high. Senior family business leaders must initiate the process of succession as the transition work can take anywhere from three to seven years.
Second red flag: multi generation stage or the cousin consortium
As the family business empire expands across regions and countries, a Chinese family firm will eventually run out of family members to occupy top management positions within the group. Even if three generations work simultaneously, the quality and competence of family managers diminishes. Overall, an ownership structure that worked well for one generation can quickly turn dysfunctional in the next.
One example of a Chinese family that I was coaching overseas was a 40-year old company owned by three siblings. For years they were operating the business effectively, then by tradition, required all the children to work in the business.
What followed after was the reality that the next generation members found the joint ownership by seven cousins no longer working effectively.
The conflict then further escalated among siblings, and then soon after, the cousins including the in-laws joined the fray right after the patriarch died.
Third Red Flag: No shareholder’s agreement and business succession planning.
A shareholders’ agreement is a contract between shareholders of a private company with the various provisions that will govern each of the shareholders who are party to the agreement vis-à-vis the Company and the shares held by each such shareholder and also the provisions that will govern the management of the company as agreed to by the parties to the agreement.
The objective of an owner’s agreement or shareholders agreement is to avoid future disputes among the shareholders. It defines the relationships between them at the outset and anticipates the issues that could cause disputes. A family that can talk about the need to put in place ownership agreements is going to be much better off than one without such a plan.
Business succession planning is critical
There are four primary steps that a family business advisor usually initiates when pursuing a business succession planning. First, there must be an analysis and understanding of the business itself including the people and finances involved.
Second, there should be a selection of the type of business succession plan. Third, the business must be properly valued so a certain baseline reference can be established. And finally, financing arrangements must be put in place to provide the means to carry out the succession plan. Below are a few of the guide questions I use in my research work:
1) Is there a long-term business plan?
2) Have you documented the ownership structure?
3) Have you initiated some form of business governance?
4) Have you formalized owner’s agreements
5) What will happen to the business if you die tomorrow?
6) How will the business’ creditors react if you die or become disabled?
Providing information will clarify the founder’s dreams of the future and the family members personal vision. It will also align the business strategically to support family & founder’s dreams and goals and ensure the sustainability of the family business.
(Professor Soriano is an Asean Family Business Advisor and Chair of the Marketing Cluster of the Ateneo Graduate School of Business. He will be facilitating one of his bestselling one-day workshops on Sept. 19, 2014 Friday, entitled The Challenges of Managing a Family Business at the Crowne Plaza, Ortigas Center. For inquiries please visit wongadvisory.com or contact Allen at 09228603186 for details. Slots are limited.)
Published in the Sun.Star Cebu newspaper on September 02, 2014.